Based on This Model Households Earn Income When

1 Chapter 10 2 3 4 5 6 7 8 9 10 Circular-Flow Model - Households - Based on this model, households earn income when firms purchase resources in resource markets to use them to produce goods and services. Circular-Flow Model - Firms - Firms earn revenue when households buy goods and services. Product Market - -Latasha spends $10 to buy a box of aspirin -Jake spends $225 to purchase software from PC Pros (scenario of flow from household to firm) GDP Measures... - 1) total income paid to everyone in the economy 2) total expenditure on economy's final goods and services Resource Market - Jake earns $250 per week working for Pillmart Pharmacy GDP Definition - The Gross Domestic Product (GDP) of the US is defined as the market value of all final goods and services produced by resources within the United States in a given period of time. Roadway Motors, a U.S. automobile company, produces a convertible at a plant in Germany on March 20, 2014. Roadway Motors imports the convertible into the United States on May 25, 2014. Included or excluded from GDP? - Excluded; Roadway Motors is a U.S. company, but because it produces the convertible in Germany, the output will be part of the GDP of Germany, not the GDP of the U.S. Zippycar, a U.S. automobile company, produces a convertible at a manufacturing plant in Minneapolis on January 11, 2014. It sells the car at a dealership in Chicago on February 4, 2014. - Included; produced domestically Fastlane, a Japanese automobile company, produces a sedan at a plant in Indiana on December 1, 2014. A family buys the sedan on December 28. - Included; Fastlane is a Japanese company, but the sedan is produced within the US and should be included in the GDP of the U.S. You chop down a cherry tree on your property in California and make a dining room table in 2014. A similar table sells for $800 in a local furniture store. - Excluded; estimating value of do-it-yourself activities is difficult and such items are generally excluded when the Bureau of Economic Analysis calculates the value of the U.S. GDP. Graincorp, a U.S. agricultural company, produces corn syrup at a plant in Iowa on September 10, 2014. It sells the corn syrup to Crunchy's for use in the production of cereal that will be made in the U.S. in 2014. 11 (Note: Focus exclusively on whether the production of the corn syrup increases GDP directly, and ignore the effect of production of the cereal on GDP). - Excluded; Because Crunchy's use the corn syrup that Graincorp proudces in the production of cereal, the corn syrup is considered an intermediate good, not a final good and therefore, doesn't directly increase GDP in U.S. The price of cereal will include value of corn syrup --> market value of corn syrup will enter GDP as part of market value of final good, cereal. Janet gets a new video camera made in U.S. Is this consumption, investment, government purchases, exports, or imports? - Consumption; it's an expenditure by individuals on goods and services made in the U.S. Janet's father in Sweden orders a bottle of Vermont maple syrup from the producer's website. Is this consumption, investment, government purchases, exports or imports? - Export; It's a good sent across national boundaries from one company of a country to another company in another country Felix's employer upgrades all of its computer systems using U.S.-made parts. Is this consumption, investment, government purchases, exports, or imports? - Investment; Consisting of spending on capital goods, household purchases of new housing, and (net) additions to inventories. Computers are part of capital stock of Felix's company --> upgrading those computers is investment spending. Felix buys a sweater made in Guatemala. Is this consumption, investment, government purchases, exports, or imports? - Imports and Consumption; the value of the sweater is added to the exports category for Guatemala and imports category for US. Sweater was The state of Pennsylvania repaves highway PA 320, which goes through the center of Swarthmroe. Is this consumption, investment, government purchases, exports, or imports? - Government Purchases; a purchase by state, local, or federal government. In this case, state of Pennsylvania repaves highway PA 320, that is considered part of government purchases. Measuring GDP (Y) - Y = C +I +G + NX Net Exports = Exports - Imports Nominal GDP - measures the value of current output using current prices nominal GDP = price (in year T) x quantity (in year T) Real GDP - measures the value of output in the current year using prices from a base year real GDP = price (in base year) x quantity (in year T) 12 GDP Deflator - measure of the price level GDP deflator = (nominal GDP/real GDP) x 100 Limitations of GDP - Doesn't account for: -illegal activities (foreign illegal drugs) -actual amount of enjoyment households receive from leisure time they have -loss of enjoyment people incur when scenic land is converted to commercial use Which of the follwing scenarios are either not accounted for or measured inaccurately by either the income or the expenditure methods of calculating GDP for the United States? -The import and sale of illegal drugs from South America -The loss of enjoyment people incur when scenic land is converted to commercial use -The leisure time they have -Funds spent by city governments to renovate their buildings -The components of an MP3 player that are produced in China - Not accounted for or measured inaccurately: -The import and sale of illegal drugs from South America -The loss of enjoyment people incur when scenic land is converted to commercial use -The leisure time they have Accounted for: -funds spent by city governments to renovate their buildings are accounted for in GDP as injections from the government into the economy -value of foreign components of U.S.-made goods is accounted for in GDP as part of imports The economy's income & expenditure The following diagram presents a circular-flow model of a simple economy. The outer set of arrows (shown in green) shows the flow of dollars, and the inner set of arrows (shown in red) shows the corresponding flow of inputs and outputs. Based on this model, households earn income when ________ purchases __________ in markets for factors of production. - Firms labor & capital The economy's income & expenditure Suppose Janet earns $650 per week working as a programmer for PC Pros. She uses $9 to have breakfast at Dinah's Diner. Dinah's Diner pays Felix $250 per week to work as a short-order cook. Felix uses $200 to purchase software from PC Pros. Identify weather its a market factors of Purchase (Product market), or Market for Goods & Services (Resource market) 13 - Market for Goods & Services: Janet spends $9 to have breakfast. Market for Factors of Purchase: Felix earns $ per week working for Dinah's Diner Janet earns $650 per week working for PC Pros. The economy's income & expenditure Which of the elements of this scenario represent a flow from a firm to a household? This could be a flow of dollars, inputs, or outputs. Check all that apply. True or False: Gross domestic product (GDP) measures total expenditures on final goods and services during a given period of time. - The breakfast Janet receives The $250 per week Felix earns working for Dinah's Diner True Activities included (not included) in the calculation of GDP The gross domestic product (GDP) of the United States is defined as the ______ all ______ _______ in a given period of time. - Market value of Final goods & services produced within the United States Activities included (not included) in the calculation of GDP Based on this definition, indicate which of the following transactions will be included in (that is, directly increase) the GDP of the United States in 2020. - Included: Fastlane, a Japanese automobile company, produces a sedan at a plant in Indian on December 14, 2020. A family buys the sedan on December 24. Zippycar, a U.S. automobile company, produces a convetible at a manufacturing plant in Minneapolis on January 6, 2020. It sells the car at a dealership in Huston on Febuary 2, 2020. Excluded: You chop down a cherry tree on your property in California and make a dining room table in 2020. A similar table sells for $800 in a local furniture store. Graincorp, a U.S. agricultural company, produces corn syrup at a plant in Iowa on September 25, 2020. It sells the corn syrup to Crunchy's for use in the production of cereal that will be made in the United States in 2020. (Note: Focus exclusively on whether production of the corn syrup increases GDP directly, and ignore the effect of production of the cereal on GDP.) Athleticus, a U.S. shoe company, produces a pair of sneakers at a plant in Vietnam on March 11, 2020. Athleticus imports the pair of sneakers into the United States on May 29, 2020. 14 Categories of expenditures Musashi and Rina Woo live in Swarthmore, PA. Rina's father, Sean, lives in Sweden. For each of the following transactions that occur in their lives, identify whether it is included in the calculation of U.S. GDP as part of consumption (C), investment (I), government purchases (G), exports (X), or imports (M). Check all that apply. Musashi's employer upgrades all of its computer systems using U.S.-made parts. Rina gets a new video camera made in the United States. The Federal Aviation Administration expands the runways at Philadelphia International Airport, which is just a few miles from Musashi and Rina's house. Rina's father in Sweden orders a bottle of Vermont maple syrup from the producer's website. Rina buys a new BMW, which was assembled in Germany. -I C G X CM Measuring GDP The following table shows data on consumption, investments, exports, imports, and government expenditures for the United States in 2014, as published by the Bureau of Economic Analysis. All figures are in billions of dollars. Name; Data (billions of dollars) Consumption (C); 11,930.3 Investment (I); 2,851.6 Exports (X); 2,337.0 Imports (M); 2,875.2 Net Exports of Goods & Services; _______ Government Purchase (G); 3,175.2 Gross Domestic Product (GDP); _______ - Exports - imports = net exports of goods & services -538.2 GDP = C +I +G + (X -M) 17,418.9 Real versus nominal GDP Consider a simple economy that produces two goods: cupcakes and erasers. The following table shows the prices and quantities of the goods over a three-year period. 15 Year; Cupcake (Price [Dollars per cupcake], Quantity [Number of cupcakes]); Erasers (Price [Dollars per eraser]; Quantity [Number of eraser]) 2018; 1, 120; 1, 195 2019; 2, 130; 4, 195 2020; 4, 130; 4, 145 Find the Nominal GDP, Real GDP, GDP Deflator. - Nominal GDP; Real GDP; GDP Deflator 2018: 315; 315; 100 2019: 1,040; 325; 320 2020: 1,100; 275; 400 Nominal GDP Calculation (Price of cupcake X Quaintly of cupcake) + (Price of eraser X Quaintly of eraser) Real GDP Calculation on 2018 (Price of cupcakes 2018 X quaintly of cupcake {for that year}) + (Price of eraser 2018 X quaintly of eraser {for that year}) GDP Deflator (Nominal GDP/Real GDP) * 100 Real versus nominal GDP From 2019 to 2020, nominal GDP _______, and real GDP ___________. The inflation rate in 2020 was _________. Why is real GDP a more accurate measure of an economy's production than nominal GDP? - Increased; Decreased 25% Real GDP is not influenced by price changes, but nominal GDP is. Limitations of GDP Although GDP is a reasonably good measure of a nation's output, it does not necessarily include all transactions and production for that nation. Which of the following scenarios are either not accounted for or measured inaccurately by either the income or the expenditure methods of calculating GDP for the United States? Check all that apply. - The value of babysitting services, when the babysitter is paid in cash & the transaction isn't reported to the government. The loss of enjoyment people incur when scenic land is converted to commercial use The leisure time enjoyed by households